What happened

Meme stocks like AMC Entertainment (AMC 1.24%) have had quite a ride since the retail trading crowd initially drove share prices up earlier this year. After realizing exponential gains, AMC shares tumbled 40% from mid-June to late July as investors began questioning whether the delta variant would reverse progress in reopening the economy. But AMC shares regained those losses in August, rising 27.3%, according to data provided by S&P Global Market Intelligence.

So what

AMC CEO Adam Aron has said that 80% of the company's shareholder base is now made up of retail investors. And Aron has worked to engage with those investors on social media and through the business itself.

A movie theater concession area with a crowd of people.

Image source: Getty Images.

The company has launched AMC Investor Connect, which gives shareholders exclusive offers for screenings and other perks. The company calls the program "an innovative, proactive communication initiative that will put AMC in direct communication with its extraordinary base of enthusiastic and passionate individual shareholders."

Now what

AMC has also taken advantage of the higher share price to raise needed capital as it struggles to get its business back on track. But that has also burdened the company with $5.5 billion in debt as the movie business struggles to attract theatergoers at the same time that production companies are releasing some movies on streaming services along with theaters. 

Retail traders have now given AMC a market cap of about $23 billion. That's a lofty valuation as the company continues to report losses, including $344 million in the second quarter ended June 30. The company also had negative free cash flow of over $250 million in the period.

But since that financial report was released on Aug. 9, shares are up 33%. That highlights the disconnect between the current underlying business and the company's valuation. But the meme stock crowd seems to dismiss a connection between the two. Barring a significant pivot in its business strategy, AMC needs movies and customers to head back to theaters. 

The recent Labor Day weekend may have also given shareholders new hope that the demise of the movie theater business is premature. Walt Disney's Shang-Chi and the Legend of the Ten Rings was released only in theaters, and it smashed the prior record for the four-day weekend with $90 million in ticket sales in the U.S. and Canada. So maybe believers in AMC are right that the business can recover. But it has a long way to go to justify any valuation close to where it currently stands.